Are Your Clients Licensed to Build in California?

Do you advise California Building Contractors?

Are you a CA Contractor? Do you like being paid for your work?

As with many matters that end up in litigation, the “Devil is in the details” in this dispute between an aerospace company and a subcontractor. The moral of the story is that it is not advisable to play fast and loose with California law if your company does not have a proper contractor’s license.

Facts: In a recent case brought for appeal in the California Second Appellate District (Covering San Luis Obispo, Santa Barbara, Ventura,[1] and Los Angeles counties in south western California) a building contractor, Phoenix Mechanical Pipeline, Inc. (Phoenix), rendered services to Space Exploration Technologies Corp (SpaceX), which included building services such as plumbing, concrete, grading, and other clearly construction related services. In addition, Phoenix rendered services to SpaceX that included non-construction services such as: trash clean up, material handling, and car washing.

This arrangement went on for the majority of two years without issue. Phoenix would invoice SpaceX for services rendered and SpaceX would pay their bill to Phoenix. However, SpaceX failed to pay for services accepted from Phoenix from October 2013 to August 2014 and further informed Phoenix that their services were no longer required. Phoenix then brought an action against SpaceX to which SpaceX filed a demur[2] that was sustained by the trial court. Phoenix then appealed the demur, which brings us to the appeal being analyzed today.

The reason that the demur was sustained by the trial court, in determining that SpaceX was not liable for the balance due, was that Phoenix was not properly licensed to act as a contractor in the State of California. Pursuant to California Building and Professions Code §7031(a) [Exceptions to rule omitted] “No person engaged in the business or acting in the capacity of a contractor, may bring or maintain any action, or recover in law or equity in any action, in any court of this state for the collection of compensation for the performance of any act or contract where a license is required by this chapter without alleging that he or she was a duly licensed contractor at all times during the performance of the act or contract regardless of the merits of the cause of action brought by the person” (Note that §7025 (b) A corporation is considered a person for the purposes of §7031 (a).)

Because Phoenix was did not plead or state that it was a duly licensed contactor the trial court held for the demurer. In a later amended complaint this appeal resulted.

Discussion: There were four issues raised by Phoenix on appeal for why it was entitled to compensation for the services provided:

Phoenix sufficiently complied with the provisions on 7031 by alleging that one of its employees was a duly licensed contractor in the state.

Phoenix was not required to have a contractor’s license because SpaceX was a “sophisticated party” and as a result was not the class of persons or entity meant to be protected by 7031.

Some of the services that were rendered were not of the type that required a contractor’s license.

Phoenix (for the first time on appeal) alleged that it was an employee, rather than a subcontractor, of SpaceX.

Phoenix insufficiently complied with 7031.

The court gave several reasons why this argument held little weight. Phoenix was arguing that it “substantially complied” [3] with the provisions of the Business and Professions code and, in so doing, that it met the “intent” of the code.

This argument is often used when there is a common law directive or dictate that gives an opinion on the method or means a person must proceed. It is a protection device in common law that prevents non-codified law from unjustly harming a compliant party when it might not be 100% clear the exact holding of the court. If a party is found to be in substantially compliance in good faith it is a protection that holds that the holding in common law has been complied with, substantially.

However, here, the court made clear that this argument does not apply. The court cited several cases in which parties to a business were licensed, but, the entity itself that is bringing the legal action is not a licensed contractor when preforming construction services. Here, Phoenix at the time of the controversy was not a duly licensed contractor. Even though they had an employee that was licensed in the state of California, the entity itself was not licensed.

The court offered several examples of instances where this line of reasoning would apply:

A partnership suing to be paid when both partners were individually licensed.

A corporation were one of the officers was a licensed contractor (as here)

However, the court did cite and seem to carve out an exception for contractors who own their business as a sole proprietorship, enter into a contract, and then later incorporate that business without any material changes. In that case the court viewed the contractor and entity to be so closely intertwined that for purposes of licensing this would be permissible. Note though, that this applies to the contract itself and the licensing component. If the sole proprietor were to let their license lapse during the transition to a corporation it appears that there would be an inability to sue, and the claim barred. §7031 plainly states that in order to not have the claim barred, the plaintiff must be licensed at “all times services are rendered”.

Please always research the process when converting your clients license or converting your license with the Contractors State License board. That is because during the process of conversion from a sole proprietorship to a corporation or LLC, there is a time period where the applicant is not licensed, unless specific elections are made. You can inadvertently expose yourself to non-payment if the procedure is not followed to a tee.

The court explained that it while it is clear that the preamble to 7031 is meant to protect homeowners from dishonest and unscrupulous practices of contractors, it is also meant to protect all parties that can be harmed by unlicensed activity. The court explained that the legislative intent of the law is to prevent harm as a result of construction services and that, because the rules are codified by the legislature and there is no ambiguity, disallow substantial compliance as a defense.

In addition, because the legislature was clear and the legislative intent of the code section agreed, Phoenix was not able to recover for services rendered that were rendered while not licensed as a contractor.

As shown above, the court found that it was not relevant whether SpaceX was or was not a sophisticated party, as the legislature was clear that there is no differentiation between the party types. The California Business and Professions Code requires a contractor rendering construction services to be duly licensed or there is a complete bar to recovery. Bear in mind however, there are exceptions to this argument based on jurisdictional grounds. For example a contractor does not need a California contractor’s license to operate on Federal lands and projects. Always read the fine print though, many Federal contracts require that the contractor be licensed in the states where they operate in order to qualify as a Federal contractor.

Services that are non-construction related are recoverable.

The court went on to say that even though the construction services were not recoverable, there may be recovery for non-construction related services. Phoenix argued that each invoice sent to SpaceX was a separate contract. Because of this, invoices that were for car washing, trash hauling, and materials management are possible to recover against. In this case on appeal the court was not able to make the factual analysis to make that determination, so it remanded for factual analysis back to the trial court[4]. If the trial court finds that the non-construction services can be severed from the construction services then the non-construction services can be recoverable. However, if they are found to be so intertwined that they are in effect the same services, then the service provider must be licensed as a contractor.

Phoenix as an employee of SpaceX

The court flatly rejected this argument. The fact that Phoenix pleaded it was a sub-contractor, acted as a subcontractor, and invoiced as a subcontractor made this impossible in the eyes of the court.

Conclusion: In order to do business in California as a building contractor you MUST be licensed at ALL times you are performing construction work. If for some reason a license becomes invalid during a project, I always advise my clients to stop work until it is again valid. This of course can become a problem when there are liquidated damages and other penalties for non-progress. It is far better to make sure that the license doesn’t lapse. In addition it is vital to defend disputes that may affect the contractor’s ability to remain licensed.

As can be seen here, if you like to be paid, or you like your clients to be paid, the contractor must be licensed if they plan to work in California.

Dan Knight is principle at: The Law Office of Daniel J. Knight and Dan Knight Construction & Plumbing. He is a third generation building & engineering contractor, attorney, real-estate broker, Construction Management lecturer at Cal Poly State University (teaching construction law and accounting), and a former San Luis Obispo City Planning Commissioner.

[1] Please excuse the “oxford comma” O'Connor v. Oakhurst Dairy, No. 16-1901 (1st Cir. 2017)
[2].An assertion by the defendant [through a legal motion filed with the court] that although the facts alleged by the plaintiff in the complaint may be true, but they do not entitle the plaintiff to prevail in the lawsuit.
[3] Compliance with the substantial or essential requirements of something (as a statue or contract) that satisfies its purpose or objective even though its formal requirements are not complied with.
[4]An appeals court may remand a case to the trial court for further action if it reverses the judgment of thelower court

Having grown up in a construction family, being a third generation constructor, Dan earned his strips working with a shovel in hand and trowels and bullfloats out. He knows the value of real-world experience and expertise. Having grown up in small town America, it allows a perspective of the working people while bringing in the perspective law and politics. Involved at the local, state, and national level. Dan is able to give a voice to the small contractor, homeowner, governments, and parties interested in construction.

We feel we have a duty to the community to give back in a way that helps to keep locals local, and contributes to society’s well-being. We believe that a way we are able to do this is to actively support and recruit qualified candidates from the Construction Technology Department at Cuesta College. We feel that society teaches that a four-year degree is the only way to success in modern life. We believe that the Construction Technology Department at Cuesta College is filling the gap by teaching general studies and hands-on skills that students can take to an employer to be successful and break the myth that four-year college is the only way to succeed.

I can honestly and wholeheartedly endorse Dan Knight after almost a year of working alongside each other. He shows genuine integrity, intelligence and a strong work ethic in everything he does. If you ever have a chance to work with Dan, you will understand what I am talking about.

Erik Wright, LEED AP, Construction Manager & Cost Estimator

Daniel is one of those rare people that you know will always be honest and open in business settings. He takes great pride in his work, and it definately shows both in his process and in the finished product. Daniel is constantly pushing himself to learn more, and this guarantees that he will always make accurate and relevant recommendations to those he chooses to work with. He is a great example of doing business the right way.

Kevin Campbell, Financial Advisor

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I had the pleasure of having Mr. Knight in two classes that I offered at the Santa Barbara College of Law: Environmental Law and Business Associations. Daniel was a first-rate student who was able to not only understand complex issues, but to articulate them in reasoned and comprehensible manners.